Today's FOMC Meeting Too Early for Action

Email

There is little doubt that the struggling U.S. economy could use some goosing, and the U.S. Federal Reserve is in a position to deliver a good boost.

But, a move isn't likely at the conclusion of today's (Wednesday) Federal Open Market Committee (FOMC) meeting.

While a fresh spate of data suggests new steps from the central bank are warranted, many economists warn that the economy doesn't need immediate action – especially since the prior moves from the Fed haven't been very effective.

Growth has clearly slowed and unemployment remains elevated, but the sluggish pace of the U.S. economy may not be slow enough to compel the Fed to make an impactful move today, and any Fed decisions will be pushed to later in the year.

Today's FOMC Meeting: Not Ready for QE3

The U.S. Commerce Department last week reported that the U.S. economy grew at a paltry 1.5% annual rate in the second quarter, down from 2% in the first. Plus, the Labor Department reported initial jobless claims ticked up in the latest week while the unemployment level remains at a sickly 8.2%.

Fed chief Ben Bernanke maintains that his team is prepared to take further action if unemployment stays high, but he remains vague on what action might be taken.

With the reeling recession in Europe and a slowdown in stalwart China, global growth has been severely dented and is weighing on the U.S. economy. Those factors increase the odds of a third round of quantitative easing (QE3), but the Fed may not pull the trigger Wednesday.

The central bank may decide to wait until its meets again in September.

"I think they are inching towards another round of quantitative easing, but I am not convinced they will get there this meeting," Paul Edelstein, director of financial economics at IHS Global Economics told USA Today.

Bank of America Corp. (NYSE: BAC) agrees. In a July 26 note, BofA said it expects the Federal Reserve to announce a $600 billion quantitative easing program on Sept. 13.

FOMC Could Lower Interest Rates

Instead of QE3, the Fed could opt to cut interest rates, but there is little wiggle room there.

The current rate the Fed pays banks to stash their extra cash is a puny 0.25%. By lowering that rate to zero, there would be no reasons for banks to keep reserves piling up while earning zero interest. Banks could be encouraged to put those funds to better use somewhere else in the economy.

Yet, as the past has shown, this kind of move offers little in the way of making a significant difference. Banks are currently hoarding mountains of cash that are now earning next to nothing, building reserves and being stridently stingy with lending.

Team Bernanke could extend guidance to keep interest rates at historic low levels from its current 2014 forecast to until at least 2015. That would be welcome news for those who can actually get a loan at those record low rates.

Anything New from the FOMC?

Bernanke has given the impression that the Federal Reserve has a lot of other tools to give the ailing U.S. economy a much needed shove, but he has not detailed what those tools are. He may need to hammer out something soon, or we will all be shoveling out from under a new heap of fiscal woes.

Stuart Hoffman, chief economist with PNC Financial Services in Europe told CNN Money that a coordinated move with the European Central Bank, the Bank of England and other central banks may be the Fed's wildcard. Hoffman noted that with stocks continuing to slide and the onslaught of abysmal economic data, Bernanke may have to play that card soon – but not as soon as today.

As the meeting draws to a close today, economists expect little change to come this week – meaning the economy will have to limp along a little longer.

"No matter what the Fed does right now, it will have little impact on both interest rates and the economy. We spend an enormous amount of time discussing these things, but they really don't matter right now," Jeffrey Bergstrand, finance professor at the University of Notre Dame and a former Federal Reserve economist, told CNN Money.

Bernanke will hold a press conference at 2 p.m. after today's FOMC meeting.

Related Articles and News:

Join the conversation. Click here to jump to comments…

Leave a Reply

Your email address will not be published. Required fields are marked *


3 − three =

Some HTML is OK